Tuesday, March 15, 2011

What the demise of China Media Express says about the demise of Hank Greenberg and AIG

I met Hank Greenberg in late 2000. He was chatting mostly to Ajit Jain – the Berkshire Hathaway reinsurance impresario and I was a spare wheel. But Hank was I thought the most impressive person I had ever met. He name-dropped shamelessly (he had had just flown back to New York on a private jet after “chatting” with Li Peng). But he was so far ahead of me on so many issues it made me feel dumb. He even looked – at least in the brief conversation – as if he were considerably smarter than Ajit Jain – and Ajit is no intellectual slouch.

I was just out of my league...

Anyway there is a view around AIG – a view that I shared – that AIG was built in the mold of Hank and it required Hank – a certified genius and an unbelievable workaholic – to keep it all together. AIG you see had a single risk control mechanism: Hank.

In this view Elliot Spitzer by causing the demise of Hank Greenberg caused the demise of AIG – and by extension the demise of the entire financial system.

I thought that might be going a bit far – but it is hard to argue against the proposition that AIG got much more risky without Hank around.

And the stories were legion too. I know someone who was on a trading floor for AIG in Taiwan. There was a big error and it potentially exposed AIG to hundreds of millions in losses. Everyone was kept silent because if it leaked then people would front-run AIG closing their position and thus increasing their losses. People slept at their desks.

But the next morning – fresh off the private jet from New York – there was Hank. He had come to take control of the situation – and he stood behind traders as they solved the problems for minimum losses.

Hank was the man.

Now Hank is only a couple of percent the man he used to be. His multi-billion dollar holding of AIG has been reduced to its last few hundred million. His main asset is Starr Asia – a holding company for a variety of Asian investments (and some old AIG stock). It was through Starr that Hank made his investment in China Media Express (CCME).

At peak Starr's investment in CCME was worth over $60 million. This is nothing to the Hank of old – but the new diminished Hank probably thinks that $60 million is a lot of money. It might even be a reasonable proportion of Hank's fortune. As recently as January 2010 Starr dropped another $30 million into CCME. And by that time CCME was a controversial company.

The demise of CCME

I wrote that China Media Express was either (a) one of the best businesses in the history of capitalism or (b) one of the most brazen frauds in the history of capitalism.

Given the auditor has resigned and is suggesting fraud, the company is suspended and well – all sorts of other ugliness – we know which now. It was one of the most brazen frauds in the history of capitalism.

And we know who was the biggest victim: Hank Greenberg.

And given Hank's much diminished status this was not chump change. It was a meaningful hit.

If your one-man-risk-control unit can be fooled by something so obvious then why couldn't it also be fooled by someone offering 25 bps extra carry by double-levering life insurance statutory funds into the AAA strips of subprime securitizations?

China Media Express – apart from being a really fun story – punctures the last Hank Greenberg myth – a myth that I personally believed.

John

PS. I think we can conclude that Ajit Jain really was the most impressive person at that table. I sure as hell wasn't.

Shareholders of China Agritech (CAGC) should be paying very close attention. The logical fallacy of "argument from authority" has been painfully exposed at CCME. Investors who "outsource" their thinking, believing that if Greenberg was in the stock it HAD to be good, have only themselves to blame.

And in other news, an 8k filing has revealed that the hardest working man in finance, SBAY's James T. Crane has suddenly resigned. SBAY has still not filed its 10Q originally due on Feb 15th.

Unfortunately one of the problems with irony/sarcasm is that quite a few people just don't get it - especially when the message read w/o these subtle spices supports in some sense their way of thinking (or taking it non-seriously would undermine their sense of self-security they get from being stiffs).

I recently watched a video of a lecture given by Value Partner's Cheah Cheng Hye at Columbia buisiness school on investing in China. He's been at it for years and said he said he still gets taken in by fraud. There are people that are masters at smiling at you and making you believe in their stories. Even good old fashion kicking the tires will not always prevent mistakes and he doesn't believe in concentrated portfolio when investing in china.

HG just had a bad day perhaps. Or the cultural clash is too much for him to even comprehend that such fraud is possible.

Oh, man, there are some things i'd rather not be reminded of. And yet, i only forget at my own peril: everything human is infested with idiots. The comments on your cross-posted article on NC just brought home that.

I used to wish i could be someone hated by idiots, but i've never had the skills to make that happen. But you seem to have struck a perfect balance between dry facts and writing style that separates wheat from chaff. I have limited interest on the analytical side, but read your blog sometimes simply for the entertaining style. It is just hard to digest that there can be people who are not getting the fun of it. I may be an idiot myself, but I can appreciate your writing skill.

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